The Fear & Greed Index provides an excellent, quick snapshot into the emotional undercurrents propelling the US stock market. To create this index CNN Business combined seven different markers of market activity. Based on a formula developed by our researchers, it computes an overall score from 0 to 100. A 100 score means investors are in a state of peak greed, whereas a score of 0 means they’re in a state of peak fear. By studying this index, investors, traders, and other market actors can better understand the current mood of the market and act accordingly.
The index includes several different metrics, with each metric equally weighted in the total score. A scenario underpinned by the lofty performance of the S&P 500 as one of the biggest warning signs. It acts as a leading indicator for the general health of the stock market. When the S&P 500 trades above its 125-day moving average, that’s a sign of very strong positive momentum. That trend means that investors are increasingly positioning themselves for a bullish outlook. After all, this long-term moving average serves as a gatekeeping indicator. This provides a useful counterpoint to their current stock price levels, providing important context relative to their performance over the last few months.
The Fear & Greed Index is more than just the S&P 500. It positively measures stock price momentum, or how well stocks are doing compared to their own past. This last feature of the index is key. It’s a great barometer for how investors are leaning against or with the general market. Stocks are traditionally viewed as riskier investments compared to bonds. For example, one of the 13 indicators used in the index is the difference between the 20-day returns of stocks and bonds. A ratio above 1 typically indicates a bearish sentiment. This would imply that investors are starting to prefer bonds over stocks due to increased uncertainty.
The market consists of thousands of stocks, and even with sharp market declines, on any particular normal trading day investors are buying and selling rapidly and heavily. As you can imagine, this dynamic presents a unique challenge with a rapidly changing environment that mirrors a broad spectrum of feelings and attitudes. The Fear & Greed Index seeks to distill these fluctuations into a single score, helping investors discern what emotional factors are influencing market behavior at any moment.
When fear is in control, the Fear & Greed Index score is low. In reaction, investors usually retreat from equities and run to safer investments like bonds. A score of 100 means conditions are completely optimistic. In this macro environment, investors are more risk tolerant and moving money into equities. It’s an investor’s job to look at the stock market levels against historical averages. This process enables them to identify where today’s realities create new opportunities—or new dangers.
The true utility of the Fear & Greed Index is in providing clarity amid the constant market noise we experience. By better understanding emotional drivers, investors can get ahead of trends before they become mainstream. In an environment as dynamic as this one, market sentiment can change in an instant. News headlines, economic data, and global flashpoints all contribute to making these swift fluctuations a reality.